Bankruptcy proceedings start with the filing of a petition with the bankruptcy court. The filing of the petitions creates a bankruptcy estate, which generally consists of all the assets of the person filing the bankruptcy petition.  A separate taxable entity is made if the bankruptcy petition is filed by a private under chapter 7 or chapter 11 of the Bankruptcy Code.

The tax obligations of the person filing a bankruptcy petition (the debtor) vary relying on the bankruptcy chapter beneath which the petition was filed.

Usually, when a debt owed to another is canceled the number canceled or forgiven will thought of income that is taxed to the person owe the debt.  If a debt is canceled beneath a bankruptcy continuing, the number canceled isn’t income.  However, the canceled debt reduces the quantity of alternative tax benefits the debtor would rather be entitled to.

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